Maryland’s New Budget Challenge

By Neil Bergsman

In the past few months, Maryland’s budget picture has gone from bad to worse. The challenge the Governor and legislature face now is completely different from what we envisioned when the legislature approved this year’s budget back in April.

The way we were back in April

When the 2008 legislature finished its work, the state’s financial forecast looked like this:

This year, we were supposed to start with over $500 million in the Treasury. Most of this surplus was available because of the Governor and legislature met in special session last year to approve new revenues that began last January.

We planned to get through the current fiscal year with a $236 million surplus, that we would carry over into next year. Even in April, a $234 million shortfall was projected for fiscal year 2010. The Governor knew he would be making further adjustments to the budget to close this gap.

The way we are now
Since last April, three things have happened to change this picture:

1. Fiscal year 2008 close-out
   $73 million short
2. Fiscal year 2009 revenue estimates
   $432 million down
3. Fiscal year 2010 revenues
   $512 million down

As the national economy has faltered, the state has reduced its estimates of income tax and sales tax revenue. These two sources make up ¾ of the state’s general fund revenue, and they are very sensitive to changes in economy.

The new estimates affect the current fiscal year (fiscal year 2009, which runs from July 2008 through June 2009) and the upcoming year (fiscal year 2010). As a result, the numbers for this year and next year are a lot worse. Here’s what the forecast looks like now:

As a result of the revenue downturn, this year’s projected balance has changed from a surplus to a deficit. (However, without the early start-up of the special session revenues, this shortfall would have been much worse).

What’s next?
We expect Governor Martin O’Malley to send the state’s Board of Public Works a
package of cuts in mid-October to erase this year’s shortfall. This will be on top of $50 million in cuts approved in June.

Because the Governor must take actions to erase the projected deficit, we do not carry the negative balance forward into fiscal year 2010. Even starting from a balance of zero, next year’s shortfall is forecast at nearly $1 billion. In January, the Governor will need to submit a balanced budget for 2010.

The “easy” cuts are gone
In the last two years, the state has subtracted over $1 billion from its projected spending. These cuts have affected local schools, health programs, the state workforce, and general government operations. Some have been fairly visible, like closures of a mental health facility, a shelter program for juveniles, and a state police barracks. Others have been less visible, such as “deferred” planned expansions, tapped alternative fund sources, or extended hiring freezes.

The upcoming rounds of cuts are likely to have more severe impacts. Education and health add up the 2/3 of the state’s general fund spending, so will be hard to avoid cuts to those areas. The least painful options have already been used. The options that remain all hurt someone.

Slots won’t help much
Even if voters approve the referendum of slot machines in November, significant
revenue will not start flowing for two more years. The only help from slots for the 2010 budget will be up to $90 million in licensing fees. These fees are already figured into the billion-dollar shortfall calculation. If the voters defeat the referendum, the problem grows by $90 million.

December is a question mark
Before the Governor makes his final budget decisions, the Board of Revenue
Estimates will issues its final revenue estimates. The September estimates came out before the take-overs of Fannie Mae, Freddy Mac and AIG by the federal
government, the bankruptcy of Lehman Brothers, the sale of Washington Mutual, and the events surrounding the proposed Treasury rescue of the credit markets.

The September estimates also did not reduce the estimate of corporation income tax revenues. Estimators are waiting for the results of the fall corporate filing season. It is likely that corporation tax estimates will be reduced in December.

So the December revenues are liable to get worse.

The September estimate also did not allow for any expenditure deficiencies in state agencies. Foster Care, Medicaid, public assistance, and prisons are all subject to budget over-runs during an economic downturn. These deficiencies will also enlarge the budget shortfall.

Important needs are already unmet
We are working with a budget that is already inadequate. Public school aid is not keeping up with inflation. Doctors and hospitals lose money by accepting Medicaid patients because of low state payment rates. There are long waiting lists for services for developmentally disabled adults, senior citizens, and vocational rehabilitation. As more citizens are applying for safety net protection, the state cannot fill vacant positions of the workers who process the applications.

The cuts will be made to a budget that is already in shreds.

No help from Uncle Sam
The economic stimulus bills considered in Congress contained fiscal relief for states in the form of an increased federal share for Medicaid. The benefit to Maryland is estimated at $300 million. Supporting state budgets is considered one of the most effective ways to stimulate the economy. Unfortunately, the bill passed the House of Representatives but failed in the US Senate. This relief could have been used to protect the expansion of health coverage to 100,000 uninsured Marylanders and avoid cuts to other vital services for vulnerable Marylanders.

There’s money in the Rainy Day Fund
Finally, Maryland has done a good job of saving for a rainy day. The “Rainy Day
Fund” (officially the State Reserve Fund Revenue Stabilization Account) has about $700 million (after transferring $125 million for the current year).

The state should use this resource carefully, and only with a plan to rebalance the budget and restore the Rainy Day Fund balance over time. However, withdrawing some amount from the rainy day Fund may be better than punitive cuts in services to vulnerable citizens.

Should revenues go back on the table?
After increasing revenues $1.3 billion last year, there is little appetite among elected officials for further tax increases. MB&TPI supports the Governor and legislative leaders in thoroughly reviewing state spending and the state’s service needs as the first order of business in addressing our budget shortfalls.

Given the size of the budget gap, we might get to a point where more revenues are preferable to more cuts. There are options worth considering, including closing loopholes and shutting down special tax breaks, or raising the tax on alcohol for the first time in 40 years. Over the longer term, the state should consider making permanent the three-year ¾% surtax on income over $1 million.

Fiscally prudent – socially responsible
“Fiscally prudent and socially responsible” was the motto of former Appropriations Chairman Pete Rawlings. It’s the principle Maryland should use in the current budget challenge. The Governor and legislative leaders must act responsibly to put the state’s finances on a sound footing. They must do so in a way that reflects Maryland’s values of care and compassion. The choices ahead will be hard ones. Our leaders can meet this challenge in a fair, humane and responsible way.

MB&TPI